The Fuse

Oil Majors Make Cuts, But Risks Only Grow

by Nick Cunningham | January 27, 2021

At the start of 2021, the oil majors find themselves at a crossroads. Their old business models are failing and the world is clearly already in the midst of an energy transition.

Beginning last year, the European majors began a tentative step towards a shift in the direction of cleaner energy. In contrast, the American oil majors dug in their heels and doubled-down on oil and gas drilling. Either way, the financial pain that has enveloped the oil majors is likely just beginning.

Acquisitions of onshore and offshore licenses plunged to a five-year low in 2020.

Capex cuts and red ink
While the strategies of the five western oil majors – BP, ExxonMobil, Royal Dutch Shell, Chevron and Total – differ depending on the company, all were forced to make dramatic cuts last year in the face of the pandemic. Capex cuts were deep across the board, ambitions were reined in, and debt increased dramatically. Acquisitions of onshore and offshore licenses plunged to a five-year low in 2020, down to levels last seen during the previous market meltdown.

BP, Total and Shell announced strategy shifts, making mid-century net-zero pledges and incremental moves towards clean energy. For example, BP announced a plan to wind down oil and gas production by 40 percent over the next decade, while pledging to ratchet up renewable energy installations.

Reuters reports that the British oil giant has since shrunk its exploration team from over 700 people down to less than 100. Overall, the company is in the midst of eliminating 10,000 jobs. “The winds have turned very chilly in the exploration team since Looney’s arrival. This is happening incredibly fast,” a senior member of the team told Reuters, referring to CEO Bernard Looney, who took over at the company early last year. Another said: “We are in a harvest mode and what isn’t being said is that BP is going to be a much smaller company without exploration.”

Both BP and Shell dramatically cut their dividends last year in order to free up cash to fund their operations (and their attempts at transition). They also both announced massive write-downs. Shell’s impairments could swell to as much as $22 billion when its fourth quarter numbers are announced in early February.

ExxonMobil resisted major changes, prioritizing growth in its two core areas, the Permian basin and offshore Guyana. However, it too made deep cuts, even as it stubbornly vowed to stick to its growth plan.

But even ExxonMobil will be unable to hold onto the previous way of doing business. The Wall Street Journal reports that the supermajor is considering a board shakeup and an increase in investments in sustainability. The potential move comes as activist investors are pressuring the company to change its ways, although the odds of a transformational overhaul appear slim. The move also comes after a rough 2020 in which Exxon wrote down nearly $20 billion in assets, slashed capex and backed away from its aggressive Permian growth targets.

Critics argue that Exxon’s determination to pursue long-lived projects is foolhardy

Exxon’s two main growth areas still hold tons of risk. Critics argue that Exxon’s determination to pursue long-lived projects is foolhardy. Meanwhile, the U.S. Securities and Exchange Commission is probing the company after a whistleblower told regulators that Exxon is inflating the value of its Permian assets.

The combined market share of the five oil majors is now smaller than Tesla. The oil industry likes to talk up its ability to create jobs, but their footprints are shrinking. In addition to BP’s elimination of 10,000 jobs, Shell is cutting 9,000 jobs and Exxon is eliminating 14,000 jobs.

Small shifts underway
In just the past week, Royal Dutch Shell announced purchases of the UK’s largest network of electric vehicle recharging stations, as well as taking a stake in a large offshore wind project in the Ireland. They are small examples of how the European majors are trying to pivot in this new era.

French oil giant Total is arguably going furthest in its efforts at transition, pledging last year to “grow by one-third, roughly from 3 million BOE/D (Barrels of Oil Equivalent per Day) to 4 million BOE/D, half from LNG, half from electricity, mainly from renewables.” It’s something of the beginning of a “blueprint for how to transition on oil company into an energy company,” according to a recent commentary by IEEFA.

It’s not clear that Total can pull this off. Total’s stock price is roughly at the same place now compared to five years ago, whereas ExxonMobil has seen its shares lose 40 percent of their value. At a minimum that suggests that financial markets are less keen on Exxon’s growth strategy. But Total also intends to continue to rely on oil and gas production to fund its transition, a paradox that will prove difficult to untangle.

S&P Global Ratings warned that it may cut the credit ratings of four of the oil majors.

In fact, on January 26, S&P Global Ratings warned that it may cut the credit ratings of four of the oil majors. “S&P Global Ratings believes the energy transition, price volatility, and weaker profitability are increasing risks for oil and gas producers,” it said in a statement. In fact, S&P ratcheted up its risk assessment for the entire oil and gas sector to “moderately high” from “intermediate.” A credit rating cut would hike the cost of capital, further hampering the financial outlook of the companies and their projects.

It comes as no surprise that the credit ratings of the oil majors are receiving scrutiny after taking on a ton of debt in the wake of a global pandemic and a historic downturn in oil markets. But what stood out in S&P’s statement was that the “energy transition” was front of mind for the analysts, posing financial risks that are not cyclical. None of the oil majors have really figured out a way to navigate through the choppy waters ahead.